Jeremy Siegel begs the question

In a July 15th New York Times piece, Jeremy Siegel emphasizes that investors should remain bullish. He makes his classic bullish argument based on stock returns from 1802 forward (which is based on potentially flawed index data), and then makes another argument relying on more recent data:

“If post-World War II patterns hold for the future, he calculated last week, prospects for stock investments are excellent: there would be a 96.6 percent probability of a positive return for the next 5 years, going up to 100 percent for 10- and 20-year periods. Average real returns would be stellar — about 11 percent annually in holding periods from 1 to 20 years.”

So basically, he is saying that “If stocks are in a favorable environment, they are going to go up.” Considering the current economic environment is one in which the very capital unfriendly sector of health care looks to be the biggest driver of GDP growth in the developed world, the long term outlook on stocks should not be so sanguine. The bearish response included in the article wasn't much better, as even one of the people responding to Siegel, Lubas Pastor, takes the equity premium that is necessary for Siege's argument as a given.

“It’s important to realize that stocks should produce higher returns, because they’re riskier.”

As Eric Falkenstein shows, the argument for an equity premium is not as straightforward as many finance professors like to think. Too bad this more accurate point of view was nowhere to be found in this article.

HT: Mankiw

About

I studied Bioengineering at the University of California at San Diego. While there I served as a trustee on the investment committee of the UCSD Student Foundation, a group that manages an endowment to fund scholarships. While in college I applied my interest in finance and economics by working as a summer associate at Clarium Capital Management, working part time my senior year, and joining full time when I graduated in 2006, staying there through August 2010. I am currently working as a portfolio manager at another global macro hedge-fund in the Presidio (And blogging about more directly market related ideas at their restricted blog). I’ve been focusing on quantitative finance, currencies, commodities, the interplay between finance and politics, demography and other long term trends.

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